Since OPEC starting implementing its production cut agreement in January, US producers have responded to higher prices by adding 172 new oil rigs.
Weekly data released Friday show the rig count is up 9 more rigs for total of 697 operating oil rigs in the US. One year ago, there were just 332 oil rigs in operation.
Also on Friday, EIA reported monthly data for February 2017 showing US crude production was 9.031 million barrels a day - the first month above 9 mbd since March 2016.
According to EIA’s April Short Term Energy Outlook (STEO), US crude production for March 2017 was an estimated 9.1 mbd, the highest level in a year.
So far the OPEC deal is not working as intended as US rig counts and production are rising faster than anticipated in response to higher prices.
OPEC meets on May 25 in Vienna to decide whether to extend the agreement for another six months. An OPEC monitoring committee recently endorsed an extension and Gulf producers have also indicated a tentative agreement to renew the deal. In addition, there are now talks underway to get Russia to sign up for a renewal, despite the fact that Russia was the biggest cheater in complying with the deal.
In our view, OPEC probably has no choice but to renew the agreement and even a non-compliant Russia will join again to help with sentiment. However, the market has expected and priced in a rollover of the agreement, and therefore, it alone is unlikely to spur a bump in oil prices at the end of May.
The return of US shale production is starting to weigh heavily on the market, and OPEC doesn’t have any good answers to the problem.
